How to Determine Tax Rate

But there also is a component of the C corporation that has a tax rate. Currently, the C Corp rate is 21%. States and certain cities have their own tax rates – which vary and could be a flat rate or depending on your levels of income. You have to check the states or cities that you operate in to determine those rates.

How Do You Determine Your Tax Rate?

First let’s talk about the federal rate. The federal rate is considered to be an ordinary tax rate. The way that the tax structure works is there are basically ranges of income that have different tax rates. They step in amounts and percentages when they are over the top of the range moving into the next range.

Currently, the top tax rate is 37%. Once your income reaches that level, anything over that is subject to that 37% range. But not all of your income below that level is subject to that. Whatever is in is within that bracket or that range is taxed at that rate.

You’ll get a little bit of the bracket at zero or 10%, a little bit at the next bracket, a little bit at the next bracket and so on. Then that is how you identify or get your total tax that’s due. The effective rate is a blend of all of those rates all put together. 

How to Find Your Tax Rate with Capital Gains

Then there’s an added layer of complexity with capital gains. Capital gains are taxed at different rates. There is 0%, 10%, or 20% depending on the level of your income. Generally, we see the long term capital gains mostly taxed at 15%.

There are short term capital gains as well. Short term capital gains are basically taxed at ordinary rates. There is no added benefit to those gains other than you are able to offset those gains with losses in the same bucket, let’s just say. 

We’re not going to get into how much of those losses you’re able to get. That’s a whole different blog. But just know that there are short term and long term and there are different rates for both of those.

How to Figure Out Other Types of Income Taxes

In addition to long term capital gains in those different rates, there are other types of taxes for different types of income. For instance, let’s look at real estate taxes and how to determine tax rate.

A great example is when someone has purchased a building. Let’s just say a building or house that they’re renting. They depreciate that structure, not the land, but the structure, and then they go and sell it. So any gain that is recognized on that sale, there is a component that has to be recaptured because of the depreciation. Sp there is a component in this sale that has a different tax rate. That rate is 25%. So, if you’re in the 37% bracket, you only are gonna pay 25% on that portion of the gain and then there could be some long term gains as well within that same transaction.

Additionally, certain dividends that are considered qualified dividends qualify for the long term capital gains rate. So when you get your 1099, you see an amount for dividends in one box. And then there’s qualified dividends. Just know that that qualified dividend is subject to long term capital gains rates. So again, that could be 0%, 15%, or 20% rate. 

What About State Taxes?

You also need to figure out how to determine tax rate with state taxes. Depending on your state, states could have flat taxes or graduated taxes similar to the federal taxes. Typically, the states do not have the same percentages as the federal taxes. Federal is always one of your highest taxes that you pay. But your states do sometimes have graduated tax rates or brackets. Also some states will tax different types of income differently. 

It’s similar to long term capital gains rates, or qualified dividends. This will depend on where your income is coming from and where you live as to what type of taxes you’re going to incur in those states and locals and cities.

Conclusion

When figuring out how to determine tax rate, you’ll want to consider the federal rate, state taxes, capital gains, and other income taxes. Hopefully this blog will help you come tax season. We’ve also put together a masterclass on the 3 biggest financial mistakes new business owners can make. Sign up today!